Why Doctors Can’t Math Good

Daniel SmithBy Dr. Daniel Smith, WCI Columnist

“We made too many wrong mistakes.” -Yogi Berra, mid-20th century philosopher

Why is it that physicians so often make grave financial mistakes? If, in fact, we are as punctilious, hard-working, and well-read as we like to believe ourselves to be, then why are we still such easy targets for expensive insurance products, over-engineered estate planning schemes, and long-shot investments? Ostensibly, personal finance and investing are just a series of calculations that you try and optimize for current and anticipated financial needs. So, why do doctors seem to fail at what seems like fairly simple arithmetic?

The reason is that most of the errors that physicians make are due to the learned heuristics we’ve developed and the cognitive biases we’ve learned. Very few errors are purely mathematical. While hardly exhaustive, I’ll expound upon our most common miscalculations: the halo effect, confirmation bias, fear of missing out and loss aversion, deferred gratification and opportunity cost, availability bias, recency bias, anchoring bias, and survivorship bias.

Let's explore some of them.

Say you’ve just met Janet, a likable, attractive woman about your age. She speaks easily and with confidence, and you find out that you both attend the same social clubs. You develop a good relationship with Janet, and she asks you one day about what you do. You go into detail about your training and profession but lament that you weren’t taught anything in medical school about investing or finance. “Not a problem!” replies Janet with gusto. “I am actually a financial advisor and will be happy to help you out!”

You readily agree and move your accounts to her management. Welcome, Halo Effect. You’ve attributed some positive attributes to Janet: confidence, skill in speaking, taste in hobbies, and physical appearance. This sets up your subconscious to believe she also has skills in other areas like, say, managing your finances. Janet may or may not be an excellent money manager, but your subconscious has already determined that she probably is better than average. For those who balk at the notion that something so base as appearance would even subconsciously motivate their actions, the literature begs to differ.

Confirmation bias is a common psychological heuristic where one searches out information, or even filters disconfirming information, to support a predetermined conclusion. While much more noticeable in politics, we also bias our financial opinions. For example, you’ll have a hard time telling gold-bug Jerry that his 12 troy ounces of yellow lucre will underperform stocks in the long run. Indeed, he will find articles like this one touting the lustrous metal as a hard asset, inflation hedge (and paradoxically a safe retreat in times of panic), and the only useful currency in an apocalypse. For a self-satisfied chuckle, read the author’s bio at the bottom of the article. The truth is that we all have a bit of confirmation bias in our financial viewpoints: leverage up or pay down debt, needs-based or risk-based asset allocation, tilt or total market, actively or passively managed, etc. Combating this bias requires intentionally keeping an open mind and seeing the data before formulating your opinion. One of the ways hedge fund manager Ray Dalio tries to minimize confirmation bias is by asking experts in various fields how his ideas could be wrong. You don’t need to necessarily ask other people, but critical self-examination of motives and beliefs can help you avoid this pitfall.

In Roman mythology, the god Janus represented, among other things, the middle ground between dualities: greed or selflessness, war or peace, youth or age, etc. He was represented as a two-faced god and typically held a key in his hand, as he was also the god of doors and gates. Janus would have appreciated the twin pitfalls of FOMO and loss aversion. FOMO or fear of missing out is the desire to jump on the bandwagon while asset prices are rising. John Pierpont Morgan once famously said, “Nothing so undermines your financial judgment as the sight of your neighbor getting rich.” Whatever the hot speculation of the times happens to be—1870s railroad bonds, dotcom stocks, the ARKK fund, etc.—it’s natural to want to partake in the profits afforded to the early investors. It is, however, a near-dictum that the height of popularity usually coincides with the height of prices. Just as Icarus fell back to earth, all performance eventually regresses to the mean. The best way to not be the guy left holding the bag is to not buy the bag in the first place.

In contrast, we have Daniel Kahneman and Amos Tversky who wrote in 1979 that “losses loom larger than gains” with later studies suggesting that losses feel two times worse than equivalent gains. Loss aversion is the reason why someone might hold onto a falling stock because selling would “lock in” that loss. It’s also the reason we’re afraid to move from a secure VA job to a more lucrative but riskier foray into private practice. It’s why we avoid risky stocks for the perceived stability of bonds. The fix here is to take calculated risks. Do your due diligence, whether it’s a job or an investment, and make the move. Also, don’t get suckered into the sunk cost fallacy and hold onto a loser security because you feel like it should come up.

In my last article, I referenced Jim Dahle’s podcast with The Big Ern and specifically mentioned how Dr. Karsten doesn’t have an emergency fund. He quips—and probably more correctly than we’d all like to admit—that “There is this additional mental burden of spending that emergency fund on something frivolous. Like an emergency flat-screen TV or an emergency trip to Las Vegas or something like that.” The idea to which he’s referring here is basically deferred gratification and opportunity cost. I think Jim puts it well by saying that doctors are somewhat inured to the idea of spending money they don’t have as a result of carrying so much debt in training, such that it all feels like monopoly money.

Intellectually, we all know that delayed gratification typically comes with rewards. If you’re reading this blog, you or your spouse probably has a high-earning profession that required a longer or more difficult than average training path. But what happens at the end of that training path? What happened for me was a brand new (2013 at the time) BMW 128i, black on black, 6-speed manual transmission, M Sport package. Nothing says “I’ve arrived” like a new resident with a car he can’t afford. I kept the car a glorious five years but was forced to buy something a bit larger (and cheaper) when our first son was born. If I’d invested the money I spent on payments and had driven a serviceable beater, I’d have had an extra $24,000 when I finished residency, an extra $65,000 now, ~$250,000 in 20 years, or nearly $500,000 in 30 years. Now, I am not preaching austerity here, but personal finance necessitates balancing your future with your present.


Here's that sweet, sweet BMW 128i that I bought after residency.

If you’ve been reading the WCI blog long enough, you’re probably familiar with Jim’s story of purchasing a home, turning it into a rental, and coming out negative at the end of the day. If you’re not, keep reading for a while longer. A blog featuring at least part of this vignette appears about once every year or so. Jim’s proclivity for writing about home ownership during residency and being a landlord feature so prominently because he lost what was, at the time, no small amount of money. This is an example of the availability bias. Don’t misunderstand me here. He’s probably right in that owning a house during residency is a financially risky endeavor (and that you probably do have better uses for your money as a trainee), but Jim’s experience definitely colors his perspective.

Availability bias is the reason that whatever Jim Cramer yells into the TV camera tends to move stock prices, why we get so worked up over sensationalized coverage of what a political group might do in the future, or why you happen to see your new favorite car everywhere you drive. Its close cousin, recency bias, is a type of availability bias where we act on things that we’ve seen or experiences we’ve had most recently. Just ask a physician how they like their job after they’ve sat through their most recent hours-long compliance training. Ask that same physician later about their job satisfaction after they receive a thank you note from a dear patient. While it would be convenient if we took recent financial events with a large grain of salt, we’re just as prone to veer off with our money. Stay the course.

Now, I need to admit something, friends. I bought an individual stock. I know . . . I know. It’s uncompensated risk that I took on a stock, the company of which I really don’t have any more knowledge than the average Joe. But I liked the product, and I thought it would make me a multi-billionaire because who doesn’t like a good moonshot? If my grade school English teachers happen across this, I apologize for the grammatical butchery above. The stock by the way was RIVN, which I bought at ~$100 and sold at ~$60; it closed last week at $29.

Why do I admit this investing heresy? I bring this up because I still feel a bit of anchoring bias stirring within me to purchase the stock at today's price because I still feel like the stock is worth at least $100. Anchoring bias is the tendency to place a value upon something, usually something you purchase, and then stick to that value. Let’s say you purchased a home at the height of this past year’s housing frenzy. You purchased this gem for half a million and were loving the expanded home office, which currently accommodates your unridden Peloton and last week’s ironing, until rising interest rates pushed downward on home values. Suddenly, your five-bedroom, four-bath Dutch Colonial is valued at a miserly $425,000. Your spouse recently decided they absolutely must live closer to their parents across town, and you put your beloved abode up for sale. Zillow does you no favors as comps in the area are down 15% as well, and you get no bites at your list of $499,000. Valiantly you fend off low ball bids at $400,000 as housing prices continue to drift downward, all while that pernicious anchoring bias pins your heart and wallet to the $500,000 purchase price. The best way to fend off anchoring bias is to recognize that things are worth only what other people are willing to pay for them.

The last bias I’ll write about, though far from the last bias we could exposit, is survivorship bias. We’ve heard all about mutual fund survivorship bias and how only the stocks and funds which haven’t gone under or haven’t been closed are represented. There’s a bit of survivorship bias in our own personal investing, as well.

Let’s say you’ve got a friend who just loves Bitcoin. Given half a chance, and sometimes even fabricating his own chances, Bitcoin Barry extols the virtue of cryptocurrency. He’ll gladly show you his bank account with real dollars and cents gleaned from his purchase and sale of the digital fiat specul . . . er, currency. He’ll tell you that if you just read the signals, which of course anyone can, you can time the ups and downs of whatever crypto your FOMO’d heart desires.

doctors can't math good

What Bitcoin Barry doesn’t tell you is that this is the 16th such long shot he’s taken on investments in his life and that the other 15, well, haven’t been quite as fruitful. What he also doesn’t tell you is that about four out of every five friends to whom he’s proselytized Bitcoin have lost about 80% of their money invested because their tea leaves were a bit more indistinct than Barry’s. That, my friends, is survivorship bias. Nobody wants to talk about their speculative losses on dotcom stocks or Beanie Babies or tech stocks, just like nobody really likes to talk about that double bogey on hole 11, even if they put up a brave face when someone asks. How do you combat survivorship bias in investing? Read lots of good books about long-term returns (I recommend William Bernstein who’s dry enough to be even unintentionally funny) and avoid talking to your friends about speculations beyond a polite listen. If you can do this, you will be far more resistant to Barry and his ilk.

So, how do we keep our subconscious out of our financial decision-making? The easiest way I know is to follow a written investing plan. If you’re even a casual reader of this blog, you’re probably better off than most of your peers already. If you, like me, actually enjoy this stuff, then, by all means, educate yourself and write your own! If reading enough about finance and investments to be able to write your own plan sounds only marginally better than recertifying your boards, then you’re probably better off paying a professional for this service. Regardless, even the most well-intentioned and data-driven plan won’t help you unless you follow it.

If your dreams are haunted by the sound of Jim Cramer yelling “SELL” from the TV screen and the scrolling ticker full of downward red arrows, then avoid financial media at all costs (most of it is noise anyway). If you can’t keep yourself from speculating in the latest individual stock *cough RIVN* then give your brokerage account password to your more level-headed spouse and ask them to change it. The absolute best way to not make a bad decision is to pre-decide how you’ll make your decisions.


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How have you tried to avoid any of the biases I've listed above? Or have you fallen victim to them? What did you learn? Comment below!

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